Question

World Gourmet Coffee Company (WGCC) is a distributor and processor of different blends of coffee. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. WGCC currently has 15 different coffees that it offers to gourmet shops in one-pound bags. The major cost is raw materials; however, there is a substantial amount of manufacturing overhead in the predominantly automated roasting and packing process. The company uses relatively little direct labor Some of the coffees are very popular and sell in large volumes, while a few of the newer blends have very low volumes. WGCC prices its coffee at full product cost, including allocated overhead, plus a markup of 25 percent. If prices for certain coffees are significantly higher than market, adjustments are made. The company competes primarily on the quality of its products, but customers are price- conscious as well Data for the 20x1 budget include manufacturing overhead of $13,071,040, which has been allocated on the basis of each product's direct-labor cost. The budgeted direct-labor cost for 20x1 totals $1,307,104. Based on the sales budget and raw-material budget, purchases and use of raw materials (mostly coffee beans) will total $6,000,000 The expected prime costs for one-pound bags of two of the company's products are as follows Kona Malaysian Direct material Direct labor $3.10 $4.10 0.60 0.60 WGCC's controller believes the traditional product-costing system may be providing misleading cost information. She has developed an analysis of the 20x1 budgeted manufacturing-overhead costs shown in the following chart. Budgeted Activity 2,366 3,680 1,480 Activity Purchasing Material handling Quality control Roasting Blending Packaging Total manufacturing- overhead cost Cost Driver Purchase orders Setups Batches Roasting hours Blending hours Packaging hours Budgeted Cost 2,460,640 3,054,400 621,600 4,272,400 1,496,000 1,166,000 194,200 68,000 53,000 $13,071,040 Data regarding the 20x1 production of Kona and Malaysian coffee are shown in the following table. There will be no raw-material inventory for either of these coffees at the beginning of the year. Budgeted sales Batch size Setups Purchase order size 600 lb. Roasting time Blending time Packaging time Kona 2,400 lb 600 1 3 per batch Malaysian 102,000 lb 20,400 lb 3 per batch 51,000 lb. 1 lhr per 100 lb 0.5hr. per 100 lb 0.1hr pe 100 lb hr. per 100 lb. 0.5 hr. per 100 lb. 0.1 hr. per 100 lb

Answer 1

	New Product Cost
Kona coffee	$                   10.63	per pound

Working:

Activity	Budgeted Cost $	Budgeted Activity	Activity Rate $
Purchasing	2460640	2366	1040
Material handling	3054400	3680	830
Quality control	621600	1480	420
Roasting	4272400	194200	22
Blending	1496000	68000	22
Packaging	1166000	53000	22
Total manufacturing overhead cost	13071040

	Kona
Direct material	3.10
Direct labor	0.60
Manufacturing overhead:
Purchasing [(2400/600 x $1040)/2400]	1.73
Material handling [(3 x 4 x $830)/2400]	4.15
Quality control [(4 x $420)/2400]	0.70
Roasting [(24 x $22)/2400]	0.22
Blending [(12 x $22)/2400]	0.11
Packaging [(2.4 x $22)/2400]	0.02
Total cost per pound $	10.63